[AirlinePilot]

I am deeply interested in what folks here think about this bid by Delta..my airline..for the Trainer facility in Philadelphia, PA.

At the moment I am skeptical about the ability to overcome the reasons the refinery shutdown to realize savings on Jet A production. The way I see it, the refinery closed due to its inability to make money and that wont change with it reopening. This is definitely another milestone along our peak oil road. No airline has ever done anything like this that I can recall.

http://www.bloomberg.com/news/2012-04-11/delta-said-to-seek-10-fuel-savings-with-conocophillips-refinery.html

[Plantagenet]

It might work if refineries were making huge profits.

Delta could buy a refinery, run it at cost, and then save some money on the Jet-A they get from their own refinery.

But my impression is that refineries aren't making much money because they are squeezed by the high price they have to pay for crude oil. It doesn't seem like Delta will be able to squeeze out enough savings there to make such a risky move worthwhile.

[Outcast_Searcher]

Airlinepilot, I'm with you on this one. Horizontal integration used to work great before there was so much specialization, and before things were so complex.

With all the competition, Delta (like all the other major carriers) struggles to do what they specialize in well. Why does devoting resources and focus into a completely different (though related, since it is an input) industry help?

It seems to me Delta would be MUCH better off focusing on a strategic plan to effectively hedge the price of their fuel. THAT might actually lead to some kind of competitve advantage -- given the very strong long term correlation between airline profits and the cost of oil.

[dorlomin]

My one thought, if they buy a source of oil to go with that then they may be locking themselves outside of the oil market. Sort of the ultimate long term hedge.

Although in a few years the oil will perhaps be more profitable than the airflights.

[PeakOiler]

My older brother is a pilot for Fed-Ex, and he told me Fed-Ex owns, or at least is heavily invested in, a refinery in Memphis. That was a few years ago, I'm not certain if that's true today.

[AirlinePilot]

$this->bbcode_second_pass_quote('Outcast_Searcher', 'I')t seems to me Delta would be MUCH better off focusing on a strategic plan to effectively hedge the price of their fuel. THAT might actually lead to some kind of competitve advantage -- given the very strong long term correlation between airline profits and the cost of oil.

[copious.abundance]

From what they were saying on CNBC yesterday, it sounds like it's mostly going to be JP Morgan who will operate the thing. IIRC, JP Morgan will help finance the purchase, they'll sell jet fuel at wholesale prices to Delta, and then sell whatever else the refinery produces on the open market. So, JPM only has to put up part of the purchase price, but they'll get to sell the majority of the refinery's products (since jet fuel is only a minority of its output I think) on the open market. Or something along those lines. Basically JPM is trading off reduced prices received for jet fuel in exchange for a reduced purchase price. Delta is putting up part of the purchase price but getting cheaper fuel in return. Plus I bet they're both getting the refinery at a relatively cheap price from Conoco.

I don't know if they can pull it off, but it did sound like an interesting arrangement. And it sounds like JPM is taking most of the risk.

[AirlinePilot]

The deal was inked yesterday. This is going to be interesting. I didnt think vertical integration was an "in" thing in corporate America these days.

[AirlinePilot]

Im still pretty skeptical. Would really like the "industry" types around here to comment.....







Im trying to figure out how you trade jet fuel for gasoline diesel etc. Is this done normally in the energy markets? I understand options etc but this looks to be real assets traded for jet fuel. Seems somehow weird to me.

[radon]

All the good valid reasoning in the above posts: danger of lost focus because of the diversification, squeezed refinery margins disincentivising integration..

So when you think about why such a strange move now two things come to mind:

1. Some interest group within Delta lobbies it.
2. Delta anticipates supply shortages and wants to secure physical supply in case critical shortages arise on the market. They do not want to rely on financial instruments as, justifiably, they anticipate that these instruments will be unreliable in a non-market situation prone to rationing + counterparty risk involved etc. If critical shortage arises, they will have crucial advantage over the competition in the form of secured physical supply rather than contractual paper obligation. Obviously, the clients will prefer Delta to the competition, knowing that they will certainly take off on schedule rather than wait hours at the airport before the fuel arrives. This is similar to China seeking to secure bilateral energy agreements for their supply instead of relying on the oil markets. In other words - peak oil in play. The downside is the cost of diversification, but it might start to make sense for them strategically, given the situation in the market.

This may also be a combination of the above factors.

Obviously, they don't need much of non-aviation fuels, and they have to trade them for aviation fuel out of necessity - this is not a benefit for them, this is more a headache and another cost of the chosen strategy. May still make sense.

[radon]

Also, this may actually be a step towards barter economy, if you think about it. Loss of faith in the paper money. Non-aviation fuels as hard currency with its own intrinsic value.

[copious.abundance]

They're about to start bringing in Bakken oil for this refinery.

Delta Air Lines to bring N.D. crude oil by train to its Trainer refinery
$this->bbcode_second_pass_quote('', 'W')ho knew that the economic solution for the region's beleaguered oil refineries would arrive on a slow train from North Dakota?

Delta Air Lines, the new owner of the Trainer refinery that is scheduled to reopen later this month, on Thursday became the third fuel producer in the Philadelphia area to announce plans to bring in crude oil by rail from the Bakken oil field in the upper Midwest.

Edward Bastian, the airline's president, told an investor conference in New York that Delta plans to replace some imported oil at Trainer with domestic crude brought in by rail. The cheaper North Dakota crude could enhance the airline's plans to produce its own jet fuel, Bastian said.

[...]

[dorlomin]

Very old school vertical integration.

[Tanada]

How has this affected Delta's bottom line, now that WTI is rising will it help or hurt to own this refinery?

[ROCKMAN]

Tanada – Some interesting numbers from http://www.nasdaq.com/article/delta-air ... k-cm213367

“Delta paid $150 million for a Phillips 66 refinery in Trainer PA last May aiming to save $300 million a year in future fuel costs. At the time, many analysts see this acquisition as a smart fuel hedge move by Delta. However, as I previously discussed, the actual implementation of this potential fuel cost savings could be quite problematic. During a time when most refiners are reporting good earning numbers as price gain of petroleum products have outpaced stagnant WTI crude prices, Delta reported loss of $63 million at the Trainer refinery in 4Q, and expects more losses of up to $100 million in 1Q 2013. Delta chalked it up to Sandy, the super storm. However, as Platts reported that in a Dec. 2012 investor call, Delta executives said Trainer plant relies on crudes at about $4/b above Brent (The plant is old and relies on expensive imported crude feedstock mostly from Nigeria.)

Platts concluded that Delta is most likely selling gasoline and fuel oil (distillate) at a loss based on the current crack spread (to Brent). Gasoline and fuel oil accounts for more than half of Trainer’s production. Furthermore, according to Platts, “Refining experts who have done computer simulations tell JFI that Trainer economics theoretically only work using a crude slate of distillate-rich crudes such as Nigerian Forcados, which typically trade at a large premium to Brent crude.” Also, there seems to be another indication of troubles in Delta’s vertical-integration strategy of purchasing a refinery as a fuel hedge. The ex-oil-trader-turned-Delta-VP-of-Fuel, Jon Ruggles, left the company quite abruptly late last year. Ruggles, a key person behind the Trainer refinery deal, was hired away from Merrill Lynch less than a year ago to head Delta’s trading operation. Rumor has it that Ruggles' exit from Delta was somehow related to losses at the Trainer plant.

The latest from Delta executives is that they now expected Trainer to have $280 million in savings in 2013 and refine 80% if the airline's domestic jet fuel requirement. And there could still be hope for Trainer yet as Delta indicated in a recent SEC filing that the company is considering getting the cheaper Bakken crude by railcar. Given that transporting crude by railcar adds about $22 a barrel to the cost of oil, it is hard to imagine the economics could improve much at Trainer with the current Brent premium over WTI at only around $19 a barrel. To put it another way, if it were as easy as shipping Bakken oil via railcars, wouldn’t you think ConocoPhillips, who’s only been in the oil business dating back to 1875, would have figured it out long before dumping the Trainer asset?

Now thinking the worst is over after extensive restructuring and consolidation in the airline sector, most Wall Street analysts have turned optimistic towards the airline industry. Delta Airlines stock has climbed 25% in the past year outperforming the broader Bloomberg United States Airline Index, which includes Delta Airlines. Investment houses like J.P. Morgan already raised Delta’s 1Q 2013 profit estimate, citing lower fuel prices and strong travel demand.”

Well that proves it: folks who buy a company’s stock are never wrong. LOL. I wonder how many folks reading such articles as this are thinking about shorting Delta? Including those brokers that talked their clients into dumping money in Delta.

So big losses 1Q 2013 but they expect a $280 million saving in 2013? Makes me wonder if they might be playing a little word game: By selling jet fuel at a discount to the airline division that division pays $280 million less this year. But the refinery division loses a lot of money in the process. I’ve mentioned before that this is how Big Oil has gamed the system for decades: by allowing profits and losses to be split between different divisions they can max the overall corporate benefit. IOW stating that the airline will save $280 million in 2013 doesn’t necessarily mean the corporation saved that much…if any at all. I’ve seen a number of companies try to expand along the value chain over the last 4 decades. Many of them came to severely regret the effort.

[Tanada]

Based on your quote ROCKMAN it seems that with WTI and Brent now priced neck and neck that shipping Bakken tight light to the east coast is not going to save a dime over hauling in foreign crude via tanker ship.

[ROCKMAN]

Tanada - that's I speculated about where profits and loses might be directed. The refinery night sell the fuel to the airline at cost and thus the airline makes a better bottom line. But the refinery won't recover that investment anytime soon...maybe never. But if the airline saves more in the long run than the refinery cost them they win. Maybe not a big win but not a loss.

[AirlinePilot]

Some interesting news on the Trainer facility Delta bought.......profitable....maybe in 2014?

http://centreforaviation.com/analysis/d ... 014-145985

From that article......

"Delta CEO Richard Anderson remains bullish on the prospects of lower-cost Bakken. During the airline’s recent investor day he concluded the “Bakken play is enormous for this industry and for the transportation industry, we have a glut of crude in the US, and more and more of it is going to end up being priced toward WTI.”

A "glut of crude" They also blame Sandy for 'disruptions, but following where Sandy hit and the weather experienced in the Philly area....I call bullshit on that. Its a convenient excuse and doesnt make any real sense. they are bringing in oil from the bakken by rail when they can. Most of the stuff we have been refining there is tankered in I believe, but its very difficult to get data on where all the feedstock is coming from.

From delta's internal news release today......

December 27, 2013

Using cheaper domestic oil and making investments in refining equipment will help Delta subsidiary Monroe Energy’s Trainer Refinery be profitable next year, reported the Center for Aviation, noting Ed’s comments during an Investor Day presentation in New York City earlier this month.

The refinery acquired in spring 2012 has been a tremendous success in lowering the overall prices of jet fuel for Delta, Ed said during the presentation. Trainer has helped lower the refining costs it takes to turn oil into jet fuel, which adds up quickly for a company that buys about 4 billion gallons of jet fuel a year.

With additional contracts for lower-priced Bakken crude oil to be used at Trainer compared with more expensive oil from elsewhere, the prospects are good for a profitable year at Trainer, Ed said at Investor Day. The new contracts will supply Bakken oil at $2 to 3 less a barrel than what Trainer currently pays for crude.

“When you think that we’ve processed 180,000 barrels a day, 365 times a year, times 2 to 3 dollars, you can do the math pretty easily and see it’s a material sum of money, an opportunity yet to be attained in our run rates,” Ed said.

Delta will invest about $100 million to improve Trainer’s ability to produce more jet fuel during the year. Trainer also has very low operating costs compared to other refineries and will benefit from another year of operation by the Monroe team in place, Ed said.

Notice they are only 'confident" that trainer will move to profitability next year...with the higher prices for both WTI AND Brent...I wonder.

[ROCKMAN]

AP – yep…lots of folks thought Delta was making a dumb move at the time. Doesn’t looks so dumb now. Might be an even better deal than Delta expected. They might have made the economics works based just upon eliminating the refinery margin. Now they have that and the prospect of cheaper crude then they had originally modeled.

We also have to be careful how we read “profitable”. There were many times when BIG Oil would intentionally run the refineries at a “loss”. Depending on the dynamics and tax situation a refinery may pay a premium for its feedstock to the Big Oil that owned them and let them book the profit. But let’s say a refinery did a big expensive revamp and was going to show a big paper loss: they might be allowed a big margin by making that Big Oil marketing division take the hit. Delta might say the refinery makes a profit next year but if you look at their tax returns you might see a different story. There’s a reason Big Oil sometimes pays their tax accounts more than their geologists and engineers.

BTW there may be as much as 50,000 bbls of Eagle Ford oil passing daily by that refinery on its way by tanker to Montreal refineries. Even with the cost of shipping the oil from south Texas those refineries make a better spread than a Texas refinery can. Also what Delta did isn't that much different than what the Saudis are doing with their big refinery JV's with China. The KSA may sell a lot of oil but they also buy a lot of imported refinery product. Cracking their own oil allows them to cut out at least one middle man…just like Delta. It also allows them to pull oil out of the market place putting a little upward pressure on prices. And then there's Mexico…a major source of US oil imports. But we then turn around and ship about 25% of the value of those imports back to Mexico as products since PEMEX is very poor when it comes to refining. And not too surprising: the Chinese are sniffing around Mexico hinting about building refineries there. there's even a rumor of building a refinery specifically designed to crack Eagle Ford oil. If it makes sense to ship it half way around the country to Canada why not ship it just a few miles across the border?

[Synapsid]

ROCKMAN,

Not to give China all the credit: I notice that Saudi Aramco has refinery JVs with Sumitomo Chemical, Exxon/Mobil, Shell, and Total. Saudi Aramco is also hitched up with another Chinese refinery, and holds stock in a Japanese/Shell company and a Korean one. There's also Motiva down there in Port Arthur, and in prospect a refinery in Yunnan and one in Indonesia.

Gathering no moss, they Saudis.